Today, crude oil prices range from 100 to 110 dollars per barrel, at a time when the policy of brinkmanship between Iran and the West is dominating international politics. In fact, this is not the first crisis of its kind in modern history. In October 1962, the world came to witness the Cuban missile crisis, when then U.S. President John F. Kennedy threatened to attack the nuclear warheads deployed by the USSR in Cuba, aimed at the United States. But after a few fateful days, Soviet President Khrushchev decided to withdraw Soviet missiles from Cuba, and the dangerous showdown between the two superpowers ended. The brinkmanship currently seen, in principle, is no different from the Cuban crisis. On the one hand, Iran insists on maintaining its nuclear policy, without any change in priorities. On the other hand, Western nations, with Israel not far behind, purport that Iran is pursuing a nuclear weapons program with the purpose of producing a nuclear bomb. However, Tehran denies these allegations, while not allowing Western countries to ascertain the true goals of the program, raising doubts about its intentions in the process. Iran is trying to accentuate its military clout in the current confrontation, either by disseminating news and documentary footage of its missiles arsenal, or by parading its naval forces, and threatening to shut down the Strait of Hormuz to international shipping. However, the Western countries have reacted quickly by dispatching battleships into the Strait to establish their right and authority in using this vital waterway for the shipping of crude oil to global markets. Thus, the showdown is ongoing, with strengths and weaknesses for each side, while oil prices remain above their normal levels because of these extraordinary circumstances, and for other purely economic reasons pertaining to supply and demand dynamics. Here, Europe is aware that the crisis will lead to higher prices, and it seems that the continent is willing to pay this price. This is while Iran knows full well that it is possible to compensate its exports to Europe (around 400 thousand barrels per day) either though the commercial or strategic reserves of European countries or by purchasing oil from other countries. Here, too, it is clear that Iran is willing to carry on with its policy, despite the negative impact on its economy. Iran has threatened to close the Strait, but did not specify a timeframe for such a move. Iran knows very well that any closure of the crucial conduit, even for a very short time, will prompt Western action against it, with a view to open the Strait of Hormuz. But in the event the Strait is shut down for a lengthy period of time, this will have a more violent reaction. As is known to Tehran, there are adequate alternatives to its oils, whether by tapping strategic reserves in industrialized countries – which can last up to two months in most cases-, or by increasing output in some oil-producing countries. The latter measure would have the aim of either avoiding a shortage in the markets, a known policy pursued by major oil-producers, or producing oil at the maximum available capacity in some countries, to take advantage of the shortage in supplies and high prices, as is the norm in the majority of oil countries. In truth, this is not new in the world of oil, as Iran had attempted to produce at maximum capacity in the nineties, to take advantage of the embargo on Iraqi oil. Meanwhile, the Iranian Shura Council is considering immediately shutting down oil exports to Europe, in an attempt to punish Europe before it obtains reassurances regarding alternative supplies that would offset lost Iranian imports in July and onwards, as EU counties have agreed to. Naturally, a measure such as this one would push crude oil prices up. But will it damage the European economy as some elements believe in Tehran? This is doubtable, as total Iranian exports to Europe are rather limited in quantity, and are not significant enough that they cannot be replaced. Of course, stopping Iranian oil flow to Europe immediately would damage some countries, especially Greece, which receives large discounts from Iran. But it is possible to compensate for this oil from other countries, or through financial assistance from the EU. However, as much as this will be a difficult situation for Europe, it will also be difficult for Iran. Indeed, there is a costly economic price being by Iran as a result of its brinkmanship. The value of the Iranian riyal has deteriorated by record amounts, even when the sanctions have yet to come under effect, and has lost half of its value as a result of withholding the flow of U.S. dollars to Iran – i.e. the desired result of the embargo. Here, we note that this brinkmanship is not the only cause for rising prices during the past two years and up till now. For one thing, there has been a significant shortage of supplies from Libya, while production in both Yemen and Syria fell in the wake of the Arab spring. More importantly, the markets are concerned that the Arab spring may spread further to other oil-producing countries, and hence are concerned about a subsequent serious shortage of supplies. It is interesting that Europe has specified the first of July as the date for the embargo on Iranian oil to take effect, as this covers nearly the same period of time needed for Libyan oil output to regain its pre-uprising levels. Another factor that contributed to higher prices at the beginning of the year was lower productive capacity in certain non-OPEC oil producing nations. Thus, supplies from outside of OPEC shrank by about 600 thousand barrels per day in 2011, rather than rising. * Mr. Khadduri is a consultant for MEES Oil & Gas (MeesEnergy)
